Volume Weighted Average Price (VWAP) The Holy Grail for Day Trading Systems

26 Pages Posted: 4 Dec 2023

See all articles by Carlo Zarattini

Carlo Zarattini

Concretum Research

Andrew Aziz

Peak Capital Trading; Bear Bull Traders

Date Written: November 13, 2023


This paper explores the application of the Volume Weighted Average Price (VWAP) in detecting market imbalances and enhancing trading decisions across diverse market conditions. We introduce a straightforward VWAP-based day trading strategy, which initiates long positions when price is above the VWAP and short positions when it falls below the VWAP. Our analysis employs QQQ and TQQQ as primary trading instruments, covering the period from January 2, 2018, to September 28, 2023. This timeframe includes two bear markets and multiple high-volatility events, providing a comprehensive test of market variations. Our findings reveal that an initial investment of $25,000 in the VWAP Trend Trading strategy with QQQ would have grown to $192,656, net of commissions, yielding a 671% return. This performance is marked by a maximum drawdown of just 9.4% and a Sharpe Ratio of 2.1. In contrast, a passive buy-and-hold strategy in QQQ during the same period would have returned 126%, with a significantly higher maximum drawdown of 37% and a lower Sharpe Ratio of 0.7. Further enhancing our strategy with TQQQ (3x leveraged ETFs of QQQ), we observed extraordinary outcomes: a $25,000 investment surged to $2,085,417, net of commissions. This equates to an 8,242% total return, or an average annual return of 116%, maintaining a maximum drawdown comparable to the passive QQQ strategy. Although we do not regard it as a fully developed trading system, our findings highlight VWAP’s potential as a powerful tool for active traders and investors, emphasizing its superiority over standard buy-and-hold approaches in terms of profitability, risk-adjusted returns, and resilience during market fluctuations.

Keywords: Day Trading, Volume Weighted Average Price, VWAP, Day Trading Systems, QQQ, TQQQ

JEL Classification: C00, C10, C50, G00, G11

Suggested Citation

Zarattini, Carlo and Aziz, Andrew, Volume Weighted Average Price (VWAP) The Holy Grail for Day Trading Systems (November 13, 2023). Available at SSRN: https://ssrn.com/abstract=4631351 or http://dx.doi.org/10.2139/ssrn.4631351

Carlo Zarattini (Contact Author)

Concretum Research

LUGANO, 6900

Andrew Aziz

Peak Capital Trading ( email )

120 744 W Hastings
Vancouver, BC V6G 3K1

HOME PAGE: http://www.peakcapitaltrading.com

Bear Bull Traders ( email )

120 744 W Hastings
Vancouver, BC V6G 1A5

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